GSK
GlaxoSmithKline (LSE: GSK) is struggling with the increase in generic competition, as its major blockbuster drugs lose patent protection. Advair, GSK’s best selling respiratory drug, saw revenues fall 21% to £392 million in the first quarter of 2015, as it faced a fall in market share and pricing pressures.
Although its consumer healthcare and vaccines business is doing better, weakness from its pharmaceutical business continues to act as a drag on earnings. With adjusted EPS expected to fall another 16% this year, GSK can no longer afford to sustain further dividend increases. Management has said that it intends to keep its dividend at 80 pence annually until 2018.
They also expect adjusted EPS will grow in the mid-to-high single digits over in the five years from 2016 onwards. But, intensifying competition for Advair could offset the gains from the sales of new respiratory products. So, despite its 5.9% dividend yield, GSK is relatively unattractive.
SSE
Weaker wholesale electricity prices had weakened the margins of SSE’s (LSE: SSE) wholesale electricity generation business, and this trend is likely to continue as lower fuel prices will continue to exert downward pressure on wholesale electricity prices. But, it’s diversified generation mix should dampen the effect of lower wholesale prices, because its renewable capacity depends more significantly on government subsidies. In addition, it is set to benefit from the introduction of the capacity market in 2018/9.
SSE’s sizeable regulated networks business means that its earnings are generally more stable than other power generators. With a regulated asset value of £7.35 billion, its regulated networks business now accounts for just over half of the utility company’s operating profits. Its regulated asset base is also growing rapidly with the need for more investment to connect generation from renewable sources. This should enable SSE to deliver sustainable dividend growth. Its shares currently yield 5.6%
Infinis Energy
Renewable energy generator, Infinis Energy (LSE: INFI) has an impressive dividend yield of 9.3%. Lower wholesale electricity prices and less windy conditions last summer caused adjusted net income to fall 7.6% to 36.3 million.
As the business is highly cash generative, the company had sufficient free cash flow to fund its dividend payments and its capital investment needs in 2014. Its strong pipeline of new wind projects should mean that Infinis Energy’s dividend yield is sustainable in the medium term.
Infinis Energy has 43 MW of new wind plant capacity currently in construction, which will be mostly be unaffected by the withdrawal of the government’s Renewables Obligation subsidy for onshore wind farms. Even under the new contract for difference (CfD) regime, returns are still attractive; and Infinis Energy plans to continue to meet its 700 MW of renewable generation capacity target by 2017.
With a dividend yield of over 9%, Infinis Energy is an attractive income stock.
John Laing Environmental Assets
Structured in a similar way as John Laing Infrastructure Fund (LSE: JLIF), John Laing Environmental Assets (LSE: JLEN) invests primarily in in renewable energy, water treatment and waste management projects.
The fund targets an internal rate of return (IRR) of between 7.5% to 8.5%, and its fund manager currently charges a 1.0% management fee of the fund’s adjusted portfolio value. Even with the end of Renewables Obligation subsidy for onshore wind farms, the fund still has an attractive investment pipeline.
Its shares currently trade at a 4.3% premium to its net asset value (NAV), and yields 5.6%. The fund’s dividend is expected to grow in line with RPI inflation, but NAV growth is likely to be limited. This should mean that capital appreciation for the fund is also going to be limited.
